What the ECB’s move on Greek government debt is really all about

In a press release that jolted the markets, the ECB announced that it will no longer accept Greek government debt as collateral starting next week. But this news is not necessarily a potential liquidity disaster for Greek banks.

The Greek banking system is not particularly reliant on Greek sovereign debt as collateral. Figures from the Bank of Greece show that Greek financial institutions currently have about 21 billion euros of Greek sovereign exposure. Furthermore, this debt has already been subject to valuation haircuts of up to 40% when used as collateral at the ECB.

All collateral that the Greek banks use for ECB operations that is not Greek sovereign debt is still perfectly good to use. This decision of the ECB is against the Greek sovereign, not the Greek banks.

Further, any shortfall in liquidity will be fully made up by Emergency Liquidity Assistance that will be issued by the Greek Central Bank at its own risk.

So, all together, the move from the ECB should have very little immediate effect on the Greek banks – provided there is not a complete loss of confidence in the Greek banking system in the coming days – and should be viewed as what it is: The ECB is pressurizing the Greek government.

The Greek finance minister Varoufakis has been agitating for Greek debt relief since his appointment after January’s election. On Wednesday the ECB gave its answer to his moves. If the Greek government does not agree to re-enter a program, then the ECB will not allow its debt to be used as collateral.

The immediate effects should be seen as limited within market space, but huge within the political realm.

The ECB has often been accused of placing too much political pressure on governments. Wednesday’s moves shows that it has chosen to ignore those accusations once again and do what it feels is right. [Bloomberg]